Shareholders the losers in act revamp

The plan to water down the shareholder democracy provisions of the Corporations Act under the cover of cutting red tape will be a victory for directors and a loss for retail shareholders.

The federal government plans to remove the provision in the Corporations Act that allows 100 shareholders to call a general meeting. Removal of that provision will mean only those with 5 per cent of the issued capital can call a general meeting.

The main argument in favour of removing the 100 shareholder threshold is that it can be abused by disgruntled shareholders, cause undue costs and distract management from its main job of running the company.

But there is little evidence to suggest the provision has been abused.

AFR
Illustration: David Rowe

Slashing shareholder rights will likely add to the already powerful arguments in favour of retail shareholders using class actions as the preferred vehicle for ­shareholder activism.

Australia is starting to challenge the United States as the home of class actions. The proliferation of class action cases has been fuelled by the generous financial benefits for the companies providing the funding.

Litigation funders are paying the bills of several prominent law firms seeking ­compensation from companies which have made decisions that resulted in a ­spectacular losses.

These cases are obvious. What is not as obvious but may become the norm, are class actions that pursue directors for what would normally be regarded as more mundane activities such as takeovers.

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If you are a shareholder activist and you take the view that expansion by acquisition is motivated by the desire of directors to have a bigger company and pick up bigger pay packets, then you might respond by ­launching a class action.

Directors could well find themselves in court facing lawyers who are funded by a third-party, litigation-funding company which stands to walk away with 30 per cent or more of any compensation.

The idea of removing the 100 shareholder provision for calling a general meeting was first recommended 14 years ago by the Companies and Securities Advisory Committee .

A CASAC report called Shareholder ­Participation in the Modern Listed Public Company, published in June 2000, said shareholders should have to satisfy a ­significant threshold test to justify the time and expense of holding an extraordinary general meeting, rather than having matters of ­concern dealt with at the next annual ­general meeting.

It concluded that any threshold test for requisitioning an extraordinary general meeting should be substantial and apply uniformly to all listed public companies.

These issues were raised and discussed again in a discussion paper published last year by the Corporations and Markets Advisory Committee in relation to the annual general meeting and shareholder engagement. But CAMAC did not make a recommendation either for or against the 100 shareholder rule.

Lurking behind the trend towards bigger superannuation funds in Australia is an intense fight between the not-for-profit industry super funds and the profit-driven retail super funds managed by the big four banks and AMP.

The two sides are battling for control of about $10 billion in annual contributions compulsorily made by Australian ­employers to super funds.

The umpire in this fight is the Fair Work Commission which is reviewing the default fund terms of modern awards.

The industry funds come to this fight with a distinct advantage. More of their products are approved under industrial awards than the retail funds. That historical quirk could well be entrenched by the decisions of the Fair Work Commission. If the commission does not add the MySuper default products manufactured by the big four banks and AMP, to modern awards, there could be severe consequences for the profit-driven side of super.

About 80 per cent of Australians are ­disengaged from their super and are happy to have their funds go into a default option.

That option could be the main account when funds are consolidated at a later date, which would lead to an outflow of assets from retail funds.

It is not clear whether or not consumers will be winners in this battle because industry funds have shown a propensity for exhibiting diseconomies of scale: in other words, as the funds get bigger the costs go up.

A recent survey by
Chant West
showed fees for industry funds rose because of high investment management fees and higher administration fees. The same survey showed fees for retail funds had fallen. But industry fund fees are about 30 basis points lower than retail funds surveyed.

AustralianSuper, Sunsuper the big winners?

Two of the biggest winners from the review of default fund terms for modern awards are likely to be two of the biggest industry funds which are AustralianSuper and ­Sunsuper.

AustralianSuper, the country’s biggest super fund with about $65 billion in assets, is the dominant player for default super. It is listed on about 70 different awards as default option. The $24 billion Sunsuper is listed on about 60 awards as a default option.

It is noteworthy that some of the biggest private sector players are not listed as a default option on awards, including the
Westpac Banking Corp
subsidiary
BT ­Financial Group
.

The review of the default fund terms got off to a bad start when two of the three ­people appointed to an expert panel were removed this month by the Fair Work Commission president
Iain Ross
after complaints from the retail fund lobby group, the Financial Services Council. Ross was forced to remove
Stephen Gibbs
and
Vikki Allen
from the panel after Gibbs disclosed he was a director of Australian Ethical Superannuation, and Allen disclosed she was a director of Motor Trades Association of Australian Superannuation Fund.

Those disclosures should not have been a great surprise to Ross because they were listed in the press release issued by former Workplace Relations Minister and now Opposition leader
Bill Shorten
.

The two experts were replaced by ­economist
Tim Harcourt
, who has been switched from an expert panel advising the commission on the minimum wage.

Harcourt’s tenure as a member of the expert panel has got off to a shaky start, given that certain high-profile members of the retail fund sector are not comfortable that he meets the minimum criteria which is ­knowledge or experience in one or more of the following fields: finance, investment management or super.

The FSC meanwhile, has questioned the legal basis for the reconstitution of the expert panel. It claims the Employment Minister
Eric Abetz
should appoint new members. But the minister regards the deliberations of the panel as being ­independent from government.

The review of default fund terms in ­modern awards is part of a complex and bureaucratic process to determine who will get the super guarantee money flows.

First, a fund manufacturer must apply to the Australian Prudential Regulation Authority for authorisation.

The next step is to apply to the Fair Work Commission to be included in the default super list for 125 awards.

The Fair Work Commission’s decision will apply for four years and will include ­recommendations for two to 15 different default MySuper funds.

The whole default super review could be squashed by Assistant Treasurer
Arthur Sinodinos
who is reviewing the default super award process.

The departure of
Andrew Kearnan
from
Bank of America Merrill Lynch
after 18 years is a blow to the firm. He has resigned as head of research for personal reasons.

Kearnan’s analysis was always top class. He was not infallible, but you knew his research notes would cover all the bases and provide welcome insights into the balance sheet intricacies of general insurance.